Tuesday, 13 November 2007

The taxing issue of local finance

Today's Tory policy announcement is on the ever thorny issue of Council Tax and the idea that council tax level should be capped by central government but with a loophole allowing voters to approve a rise in a local referendum.This will happen just after the turkeys have voted for Christmas!Labour have responded suggesting you could probably do all this under current laws, but that isn't the same as a reasoned argument against the plan now is it, while Vince Cable of the Lib Dems is under the impression that no one is ever allowed to change their mind, so the Tories can never have another policy on Local Taxation ever again, oh and by the way doesn't local income tax sound fair. Well on the surface yes, but if you think of an inner city London Borough with a high proportion of people on benefits and taking other council services, those who do have well paid jobs will be paying a far higher proportional amount of tax than their friends in councils with a better average wage and level of benefit recipients, this will make them move out and set up an explosive positive feedback loop.So what do I think the alternative is? Give up the pretence that the council tax gives an element of local accountability and abolish it. For my local council, Sheffield, council tax only contributed to 13% of the gross expenditure, so any single figure percentage increase or decrease in the tax itself is less than a single percentage point change to the council's overall budget. Why bother, why not just lob it onto central income tax and give out the money proportionately[1], it gives the fairness of income based taxation without the potential problem of driving earners out of poor councils. Councils still get to decide what they are spending the money on in areas they are allowed leeway by central government (few) and with just as much ideological link to the people who voted for them as now (almost none :-). What about business taxes? Well they are covered by the "National Non-Domestic Rates" system, the level of which is centrally set and although collected by local councils, is redistributed by central government based on headcount. So this could easily stay as it is, although it may be more efficient to hand over collection to HM Treasury if it is nationally redistributed.

[1]I have glibly just said "proportionately" this would probably need to be a quite clever formula to take into account the demographics of a particular council.